In a speech to the US Congress last night, President Trump doubled down on his commitment to impose tariffs on both friend and foe. He declared that reciprocal tariffs against dozens of countries with barriers to US imports will kick in on April 2. This comes hot on the heels of his decision to slap 25% tariffs on imports from Canada (limited to 10% on energy) and Mexico, following delays from early February. Additionally, Trump hit imports from China with a 10% tariff, pushing the cumulative rate to 20%.
China fired back with several retaliatory measures, warning that “if war is what the US wants, be it a tariff war, a trade war or any type of war, we're ready to fight till the end,” as Reuters reported. Canada also retaliated forcefully with its own tariffs, and Mexico is expected to announce theirs on Sunday. Meanwhile, the EU is reportedly expanding the list of US goods it will target with retaliatory tariffs if Trump follows through on his threat to impose duties on steel and aluminum exports.
For the US, these tariffs hit a range of sectors hard, with the automotive and agricultural industries taking the biggest blows due to North American value chains and targeted retaliation. Our investment team has been cautious with automotive companies tied to Mexican supply chains, as well as chemical and building product manufacturers exposed to the region. The team also foresees near-term impacts on retailers, with expanded and enforced tariffs likely squeezing margins for those with significant revenue in affected areas. On the flip side, domestic companies and those that have relocated operations to the US or countries less likely to face tariffs should gain a competitive edge during these negotiations.
While we remain constructive on credit due to strong fundamentals and a healthy consumer, we’ve pulled credit risk closer to home. This move recognizes that credit spreads in key sectors, such as US and European investment-grade credit, are tight by historical standards and increasingly susceptible to rising trade-related fears.
At this juncture, we’re grappling with the potential duration and scale of Trump’s tariffs. Prolonged enforcement that invites equally forceful retaliation from more countries could weigh heavily on global financial markets and economic fundamentals. While market volatility might pressure the Trump administration to reconsider or moderate its aggressive tariff stance, we can't discount the possibility that Trump will once again surprise markets—as he did with Colombia in January—with new proposals aimed at extracting concessions. Similarly, affected parties might keep elevated tariffs on US goods for an extended period as a signal of defiance and to score political points with their own constituents.
In response to the latest tariff exchanges, US Treasury yields have declined over the past few days, and we anticipate further downward pressure on yields if growth concerns intensify. Meanwhile, credit spreads have started to widen, although not to the extent seen during the 2018 Trump tariff saga.
Although it’s too soon to deem these developments as a full-blown crisis, the escalating tariff war between the US and its major trading partners necessitates a high degree of caution. Markets are already on edge and are unlikely to wait around to see the fallout of a prolonged trade war on economic activity, commodity prices or capital expenditure plans.
The key takeaway: lean into fixed-income until the storm passes.